Weis Markets, Inc. — 2020 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Weis Markets operates 197 supermarkets in Pennsylvania and six surrounding states, with more than 23,500 associates. The filing covers the 13 weeks ended March 28, 2020, compared with the 13 weeks ended March 30, 2019. The company operated as a single reportable segment.
The business was deemed essential during the COVID-19 pandemic. Stores remained open, and management reported materially higher sales, costs and profits, while cautioning that pandemic-related demand may not continue.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $985.8 million | $876.7 million | 12.4% |
| Gross profit | $264.1 million | $229.6 million | 15.1% |
| Gross margin | 26.8% | 26.2% | +0.6 percentage points |
| Operating income | $37.4 million | $17.8 million | 110.0% |
| Operating margin | 3.8% | 2.0% | +1.8 percentage points |
| Net income | $26.7 million | $14.3 million | 86.6% |
| Net margin | 2.7% | 1.6% | +1.1 percentage points |
| Diluted EPS | $0.99 | $0.53 | 86.8% |
| Operating cash flow | $124.8 million | $32.7 million | +$92.1 million |
| Capital expenditures | $24.8 million | $24.4 million | +$0.4 million |
Sales excluding fuel increased 12.4%, while comparable-store sales increased 12.8%, or 12.9% excluding fuel. Management estimated that approximately $97.9 million of incremental sales resulted from the pandemic and related government measures; adjusted comparable-store sales growth was 1.5%, or 1.2% excluding fuel.
Grocery sales were $863.7 million, pharmacy sales were $89.3 million, fuel sales were $30.0 million and manufacturing sales were $2.8 million. Operating, general and administrative expenses increased 7.1% to $226.7 million but declined to 23.0% of sales from 24.2%, primarily because of higher sales leverage and the closure of unprofitable stores.
Investment income and interest expense shifted to a $4.0 million net loss from $2.9 million of income, including a $1.9 million unrealized loss on equity securities. Other income was $2.7 million versus $1.8 million of expense in the prior-year period, reflecting a reclassification of non-service SERP costs.
Cash Flow, Liquidity and Debt
Cash and cash equivalents increased to $158.3 million at March 28, 2020, from $66.9 million at December 28, 2019. The increase was driven primarily by $124.8 million of operating cash flow, partially offset by $25.0 million of investing cash outflows and $8.3 million of dividends.
Inventories declined by $46.4 million during the quarter, contributing significantly to operating cash flow. Marketable securities totaled $62.0 million and consisted primarily of municipal bonds and equity securities.
The company had an unsecured revolving credit facility with a $30.0 million principal commitment, plus an additional discretionary amount of up to $70.0 million. Availability was $24.0 million after $6.0 million of letters of credit. The facility matures September 1, 2022. The company stated that it had no outstanding obligation under the facility since the second quarter of 2018.
Management planned approximately $86 million of capital investment for 2020, subject to governmental restrictions and pandemic-related shutdown mandates. The company expected operating cash flow and available credit to fund working capital, capital expenditures, acquisitions, debt requirements and dividends.
Material Changes, Outlook and Risks
- COVID-19 drove a substantial, potentially temporary increase in customer demand, aided by closures of other food sources and government stimulus payments.
- The company temporarily disabled Weis 2 Go Online curbside ordering on March 14, 2020 because of volume, while maintaining Shipt home delivery. Curbside pickup resumed at all stores by April 5, 2020; weekly online sales increased approximately 200% to 400% during the pandemic.
- The company implemented enhanced safety measures, including modified hours, special shopping hours, cleaning, social-distancing measures, sneeze guards and employee temperature checks.
- Hiring increased approximately 300% to support store and distribution demand. Essential store and distribution employees received a temporary $2-per-hour wage increase.
- Management eliminated weekly newspaper circulars during the pandemic, producing cost savings, but had not determined whether printed circulars would resume.
- Non-cash LIFO expense increased to $1.5 million from $0.2 million. Management estimated a greater annual LIFO expense because of expected product-cost inflation.
- The board approved a $0.31-per-share quarterly dividend payable May 26, 2020. Future dividends remain subject to quarterly board approval and financial conditions.
- Key risks include employee illness or quarantine, supply-chain and distribution-center disruptions, increased labor and safety costs, litigation, future government regulation, changing customer purchasing patterns, cybersecurity threats and volatility in the investment portfolio.
Management expected similar sales and profit trends to continue into the beginning of the next quarter but could not estimate the longer-term effects of the pandemic, related expenses or post-pandemic economic conditions.
Important Facts for Investors to Verify
- Whether pandemic-related sales and margin benefits persist or reverse after government restrictions, stimulus payments and supply disruptions subside.
- The magnitude and duration of temporary wage increases, safety costs, hiring costs, LIFO expense and other pandemic-related operating costs.
- Progress and timing of the planned approximately $86 million 2020 capital program.
- Future performance and liquidity implications of the company’s $62.0 million investment portfolio and related market volatility.
- Availability and potential use of the revolving credit facility, including the $6.0 million of outstanding letters of credit.
- Whether online ordering, curbside pickup and delivery volumes remain elevated and become structurally profitable.
- Continuation of the $0.31 quarterly dividend and any future share repurchases under the remaining authorization for 752,468 shares.